[general_devel] Can Asia Free Itself from the IMF?
vern.weitzel at gmail.com
Sun Jul 5 18:58:27 BST 2009
Guest Author: Barry Eichengreen
There has never been a question about the ultimate purpose of the Chiang Mai
Initiative (CMI), the system of Asian financial supports created in 2000 in that
Thai city. That purpose, of course, is to create an Asian Monetary Fund, i.e., a
regional alternative to the International Monetary Fund (IMF), whose tender
ministrations during the 1997-98 financial crisis have not been forgotten or
So far, however, the CMI has been all horse and no saddle. Its credits and swaps
have never been activated. The distress following the failure of Lehman Brothers
would have been an obvious occasion. Yet, revealingly, the Bank of Korea, the
central bank hit hardest, negotiated a $30bn foreign-currency swap with the US
Federal Reserve, not with its ASEAN+3 partners.
Now, we are told, ASEAN+3 has achieved another great breakthrough, the so-called
Chiang Mai Initiative Multilateralisation (CMIM), aimed at turning its bilateral
swaps and credits into a regional reserve pool. The goal was set in 2005, and
last month ASEAN+3 finance ministers negotiated the details.
They specified contributions to their $120bn pool, set down borrowing
entitlements, and allocated voting shares.
The agreement on contributions is significant, it is said, because China and
Japan will both contribute 32 per cent. In previous regional agreements, like
capital subscriptions to the Asian Development Bank, China had always been
treated as a second-rate power and asked to contribute less. Indeed, China had
shunned Japan’s 1997 proposal to create an Asian Monetary Fund precisely because
it worried that it would play second fiddle.
That China is now acknowledged as a co-equal means that it will not stand in the
way of further co-operation.
Also significant, we are told, is the agreement to make decisions by simple
majority, with countries’ votes to be roughly in proportion to their
contributions. This means that no single country can block action, in contrast
to the IMF executive board, which makes decisions by consensus, giving large
countries like the US de facto veto power.
But do these new rules really matter? Disbursing more than 20 per cent of the
credits available to a country still requires that it first reach an agreement
with the IMF, and 20 per cent of a country’s entitlement is actually less than
it contributes to the pool. This would appear to nullify the very purpose of the
arrangement, which is to free Asia from the IMF. While there is a plan to raise
and then eliminate the 20 per cent threshold, this is left to some future,
The reason for the contradiction is straightforward. Countries putting money on
the barrelhead want assurances that their resources will not be used
frivolously, and they want to know that they will be repaid.
But regional neighbours find it hard to criticise one another’s policies and
demand course corrections. Political sensitivities run especially high in Asia.
Even in Europe, with its long history of co-operation, surveillance and
conditionality are outsourced to the IMF. Revealingly, the Fund, not the
European Union, has taken the lead in negotiating emergency assistance packages
for Hungary and Latvia.
Delinking the CMIM from the IMF will require Asian countries to undertake
hard-hitting reviews of one another’s policies and to demand difficult policy
adjustments. Here ASEAN+3 talks the talk. Its May agreement included a
commitment to establish a regional surveillance unit.
But there is no agreement on where to situate it or how to staff it. It could be
placed within ASEAN’s Secretariat in Jakarta. It could be placed inside the
Asian Development Bank in Manila. It could be given to the “neutral” Northeast
Asian country, Korea. The outcome matters – which is why governments are
fighting over it. Recall how the fateful decision to situate the IMF in
Washington, DC enhanced the influence of the US Treasury just down the street.
These dilemmas can be finessed by giving both surveillance responsibilities and
the actual power to disburse funds to an independent board insulated from
national politics. Its members, with statutory independence and long terms in
office, could function like the monetary policy committee of a central bank.
They could issue a Financial Stability Report that bluntly flags weak policies
and financial vulnerabilities. And they could demand policy adjustments as a
condition for disbursing funds. The IMF could then be shown the door.
This scheme wouldn’t solve all of Asia’s problems. But it would at least head
off one danger, namely the urge to accumulate even more reserves.
Recent volatility reinforces this temptation. If Asian countries succumb, global
imbalances and all their associated problems will return. Pooling regional
reserves as a way of making them go further is a better alternative. But making
this vision a reality requires further bold thinking.
Barry Eichengreen is Professor of Economics at the University of California,
This article was first published at Project Syndicate
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